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With CERAWeek in full swing in Houston oil giant Exxon Mobil held it's annual analyst day in New York, sharing an aggressive earnings target and capital expenditure plan for the next five years. $XOM outlined a more open engagement with shareholders and stakeholders.

Exxon CAPEX 2018

Exxon Mobil CEO Darren Woods said it would “broaden and deepen” its investor relationship in a more transparent future.  Analysts reacted positively to the higher level of disclosure at the meeting compared to what had been an almost "masonic" disclosure.  It is clear to us that the large rise in capex through 2025 and correspondingly lower FCF $XOM attempting to grow its way out of its significant low returns hole through it's assets. This would of course be logical if you have the right asets. 

With upstream volumes forecast to come close to the 5 million boe/d (mmboe/d) level by 2025 and segment earnings tripling and downstream and chemicals earnings expected to double. It would seem the asset mix fits the bill with plus $40bbl oil, and really kicks in at $60 and higher. 

Exxon Raises CAPEX

Exxon Mobil Chairman and CEO Darren Woods said that 2018 capital expenditures for 2018 would be $24 billion, including chemical, upstream, and downstream businesses. This is one billion dollars higher than 2017’s $23 billion. However $XOM from then on plans to raise CAPEX aggressively. In 2019 it will jump to $28 billion and to near $30 billion in the 2020-25 period.

Woods said Exxon’s average return on capital employed would rise to about 15%, by 2025, assuming a $60-per-barrel oil price, from the current 7% level. Much of the company’s guidance was predicated on $60 oil.

If oil averages about $40 per barrel, Exxon sees a 35% potential increase in earnings by 2025, Woods said, compared to a gain of about 135% if oil remains around the current $60 price.

Upstream Earnings

With $60 oil, the upstream business would triple divisional profit by 2005, thanks to the discovery or addition in 2017 of resources with 10 billion barrels of oil equivalent (BOE) potential; a fivefold increase in tight oil production in the Permian basin of Texas; and the addition of 25 start-up projects adding a net 1 million BOE per-day production.

Exxon has sharply cuts costs since 2014 witht he oil price collpase. In the upstream business, there was a 22% reduction in operating cash costs through 2017, said upstream head Neil Chapman. He said that production would grow to around 5 million BOE per day by 2025 from last year’s 4 million, which was down 2% from 2016.

Downstream Earnings

Downstream, including refining and chemicals, should double earnings at $60 oil that company said. This boost will come from three sources $XOM said:

  • Improved proprietary technology;
  • 20% margin improvement from a shift to higher-value products like jet fuel and away from fuel oil;
  • Integrating Permian Basin production into downstream production.

Best Assets To Exploit Since 2000

Woods emphasized that Exxon has the best set of assets available to exploit since its merger with Mobil in 2000. Five projects in particular will add 50% of the earnings from the upstream businesses:

  1. Deep-water projects in Guyana
  2. Deep water projects in Brazil,
  3. Unconventional tight oil in the U.S.such as the Permian basin (Exxon raised its resources in the Permian to 9.5 billion BOE from less than 3 billion in 2016.)
  4. Liquefied-natural-gas projects in Papua New Guinea
  5. LNG prjects in Mozambique.

XOM Assets

Dividends

In the Q&A period, Woods said  “We have the capacity to reliably grow the dividend,” adding dividend growth “in the near term would be somewhere between the ranges shown.” Later he confirmed the presentation ranges were between 3% and 5%. Wisely when pressed for a dividend growth number, Woods declined to give one. He said that “we are confident we can reliably grow the dividend at $40-per-barrel oil.”

Excess cash beyond dividend needs and company investment plans will go to shareholders in the form of buybacks, he said.

More Open Disclosure

Woods in response to analysts’ questions about the company’s disclosure in the past  said “where we are taking the business….We are trying to give you better insight.” “We are committed to making sure shareholders and stakeholders understand the business….This is the beginning of broader and deeper engagement,”

Analysts in reference to missed targets in the recent past were sceptical of the bold projections. In response Woods and Chapman both emphasized that Exxon will raise its operational control of acreage to 90% from the current 72%, arguing that will help. Wood alluded project timing being affected by partners,  “we have demonstrated success when we control our own destiny,” he said.

What investors have to understand, in a hyper Netflix and Amazon chasing world, are no instant fixes for $XOM's low upstream returns. Another factor is this record run in the SPX and DJIA has been fueled by buybacks. Accordingly cash returns have become  a greater structural component of the value proposition going forward in stocks.

A healthy balance of growth and shareholder returns in the current risk environment will most liekly be rewarded for their differentiated approach. The strategy for oil and gas is clear, what of the uncertainties surrounding long term demand with the electric vehicle threat, (cue an Elon Musk sales pitch). Tthis increasing threat to  global oil demand growth turning negative over the next 20-40 years and thus destroying the value of oil & gas assets, whether realisitc or not the perception overhnags Big Oil stocks.

With this in mind over near-to-medium term using free cash flow to expand capacity will be hammered on by "anti-Fossil" investors and analysts affecting attractiveness of the value proposition. In this environment the $XOM "business as usual" strategy needs to be enhanced by acknowledging investors' concerns and adopt a more balanced growth and cash return business model cognicant of energy changes, be it renewable energy or other expansions such as their battery tand distribution technology to counter the buzz perception of the Teslas and Amazons of the world.

Remember in Investing perception is half the battle.

Source Exxon Mobil

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